Six essential facts about savings

The average savings balance is now £16,690 in the UK, according to Halifax’s Savings Review. People are also saving more: an average of £113.77 a month, up from £85.71 ten years ago. If these figures make you feel guilty about your lack of thrift, maybe our six essential facts will help.

How much should you save?

That really depends on what you are saving for. The average first house deposit is now £35,000, a wedding costs £24,000 on average, and, according to LV=, you need £229,251 to raise a child to 18. On top of that, it is always a good idea to have savings to deal with life’s emergencies. The rule of thumb is to have at least three to six months’ earnings tucked away. That works out at between £6,000 and £13,000, based on the average UK salary.

You don’t need to save much to build up a decent nest egg

“With the impact of compound interest you can build up a substantial savings pot for the future,” says Anna Bowes, director of SavingsChampion.co.uk. “As little as £50 a month for ten years at a rate of 3 per cent gross would mean you’d have nearly £7,000 in your nest egg. If you increase that to £100 per month you would have almost £14,000 after ten years.”

Compound interest is added to your savings account so you earn interest on that interest, accelerating the growth of your money.

The average easy-access savings account pays 0.67 per cent interest

According to Moneyfacts, that is all you get. However, you do not have to settle for such a paltry return. There are many ways to boost your interest rate. “A regular savings account, where you put by a set amount each month, is a great option for anyone looking to kick-start a savings habit,” says Charlotte Nelson, a spokesperson for Moneyfacts. M&S Bank and First Direct have regular savings accounts paying 6 per cent interest, but you have to have a current account with them. Halifax’s Regular Savings accounts pays 2 per cent.

Want a higher return on your savings?

Consider a notice account or fixed-rate savings account. These pay a slightly higher interest rate than standard accounts, but you cannot get to your money for a set period. Lock your money away for five years and you can get a rate of 3.11 per cent with Secure Trust Bank. Over three years the best deal is 2.7 per cent, with RCI Bank, and over two years Aldermore pays 2.35 per cent. There is a downside, however. You will lose out if rates start to rise.

The best-paying instant access savings account is at RCI Bank at 1.65 per cent. Alternatively, you could turn your current account into a piggy bank. Nationwide and TSB pay 5 per cent on current account balances up to £2,500 and £2,000 respectively. Santander pays 3 per cent on balances between £3,000 and £20,000 but has a fee, which is going up in January. Some banks now reward customer loyalty by offering exclusive savings rates to current account holders. There is no harm in asking.

Consider an Isa?

In an Individual Savings Account your money can grow without tax being deducted from your interest payments. That can make a big difference over the long term. Over a decade, a basic-rate taxpayer would pay £427 in tax on a £100 a month savings habit in an account paying 3 per cent. A higher-rate taxpayer would lose £837. However, the average rate for an instant access Isa is 1.11 per cent, according to Moneyfacts.

A basic-rate taxpayer needs only to find a standard account paying 1.5 per cent to beat that. A higher-rate taxpayer needs to find a standard account paying 1.9 per cent. From April, basic-rate taxpayers can earn up to £1,000 interest on their savings each year before they have to pay tax, and higher-rate taxpayers can earn £500, so Isas will lose even more appeal.